Altice International - Getting Off The Fence - Positioning
All,
Please find our updated model post-Q2 numbers here.
When we wrote our initial piece in November and subsequently followed up post the Q1 call we used phrases like “stay awake please” and “trudging along”. Altice has woken the investor base with the news of the Portuguese investigation into alleged corruption by certain individuals and entities related to Altice Portugal, a subsidiary of Altice International. But initial indications view Altice International as the alleged victim of this fraud which relates to fraud in the procurement process. This has resulted in Patrick Drahi, founder and controlling shareholder joining the conference calls and promising to participate in investor meetings in London and New York in September 2023.
This email is delayed as we debated internally about increasing our position. As outlined below we are increasing our existing position, but we acknowledge it isn’t without its risks.
Investment Considerations:
- With all of the noise surrounding the fraud, the sub-bonds in Altice International traded down c.20pts from 70c to 50c but since the call they have recovered 3/4ths of the fall, currently trading in the mid-’60s. We had taken a 3% long position in November 2022 at 73%, and we are now increasing that position to 5%. It is difficult to isolate the alleged corruption, but the initial internal investigation by Altice doesn’t highlight any issue with the reported numbers. Altice International may have overpaid for certain items but the numbers and cash that are recorded are a fair reflection of where the Company stands now.
- Therefore, we can revert to our original thesis that Altice International is the stronger of the two Altice entities, with the underlying business providing some deleveraging. The Finco (sub) bonds are relatively small in size versus the overall structure. We acknowledge that a small change in the operational data could quickly leave the sub-bonds out of the money, their relatively small size also means it is unlikely that the controlling shareholder will be willing to be crammed down on the back of this tranche in any restructuring.
- The other main reason to view Altice International favourably is the fact that there are limited synergies between the various jurisdictions and in any stressed environment one or more of the assets could be sold off.
Why invest now?
- We have debated internally the timing of increasing our position. We fully expect Altice International to be proactive in refinancing upcoming maturities, with the Company stating they will be proactive, pushing maturities out, as they have historically always done, and aim to come to the market in H2. A refinancing of the front end, 2025 bond maturities and short-dated bank debt would extend and support the overall capital structure, with the sub bonds, at 0.4x turns of leverage, also benefitting. These bonds should return to a spread of 1,100 over at a minimum, as seen in May, which equates to a further 5pts of upside. We see this as a minimum uplift for these bonds.
- The leverage through the subs is still less than the leverage through the seniors at Altice France. The operations are stronger at Altice International, and although we acknowledge the subs are subordinated in the Altice International structure, the pick-up in yield of c. 500bps is unwarranted.
- Downside for the sub-bonds will come from further contagion from the Portuguese investigation. However, it should be noted that the investigation hasn’t just started and the investigators are acknowledging that Altice International are the victim of the alleged corruption.
- More realistic a failure to sell the data centres in Portugal, which is expected to yield €200-300m of proceeds, would negatively impact the bonds.
- Altice International is going to continue in the 4-4.5x leverage range, with further dividends likely. However, even at 4.5x leverage, we see the Altice International sub-bonds attractive at current levels. We see further support for the bonds from the upcoming roadshows.
Recent Results:
- As part of the Q2 conference call, Altice International reported growth in both revenue and EBITDA at c.4% (higher at constant currency at 7%) with the Company guiding to EBITDA and FCF for H223 to continue to grow at the same rate as H1. As the underlying market growth experienced in H1 Is mainly from service revenue growth of the core telecom segment, Altice International is confident that this will continue into the medium term. This has enabled them to reiterate the mid-term target of €1bn+ free cashflow.
- However, we do not expect them to deleverage, with the Company guiding to their unchanged leverage policy of 4-4.5x which implies continued dividends from Altice International to its holding companies.
- The Company has guided that Altice is likely to come to the market in the coming months, to take care of the 2025 maturities (c.€1bn, including the RCF) and possibly the 2026 (€200m of bank debt).
Altice UK Srl Loan:
- We have highlighted this in our past notes, but it is worth pointing out again. this loan is now part of the security package of Altice International debt, very little information is disclosed concerning the underlying asset. It is known to be secured by BT shares, but the level of asset coverage is unknown.
- There is some comfort from the fact that management has confirmed that if the BT shares fall and do not cover the outstanding amount of the loan, Altice International would have to mark down its asset. As of June 2023, this has not happened.
- For clarity, the Altice UK Srl loan is part of the security package for Altice International debt. This loan is secured by shares. But the shares are not part of the security package.
Other Issues:
- The process continues for the sale of the data centres in Portugal. Price discussion is in the range of €150-250m. The CFO, Malo Corbin, admitted that the process has been delayed due to the Portuguese investigation, but management remains confident a deal can be completed.
Happy to discuss.
Tomás